An increase in the number of fast-food restaurants
a. increases the demand for fast-food meals.
b. increases the supply of fast-food meals.
c. increases the demand for substitutes for fast-food meals.
d. increases both the demand and supply of fast-food meals.
An increase in the number of fast-food restaurants
a. increases the demand for fast-food meals.
b. increases the supply of fast-food meals.
c. increases the demand for substitutes for fast-food meals.
d. increases both the demand and supply of fast-food meals.
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Question 5
a) The two big fast food chains, CafeÌ de Coral and Fairwood, occupy a very large share in the Chinese fast food market in Hong Kong. Suppose these two fast food chains try to form a cartel to charge higher prices for their food. Each fast food chain can choose to charge high prices (H) or low prices (L). The payoffs to each of the fast food chains are summarized in the following matrix:
Fairwoodâs payoffs | Fairwoodâs payoffs | ||
L | H | ||
CafeÌ de Coralâs payoffs | L | (2,2) | (12,0) |
CafeÌ de Coralâs payoffs | H | (0,12) | (10,10) |
Note: The first entry is CafeÌ de Coralâs payoffs and the second entry is Fairwoodâs payoffs.)
i The cartel agreement is for each fast food chain to charge high prices (H). What are the payoffs to the two fast food chains if the agreement is observed?
ii Explain why an individual fast food chain has no incentive to charge high prices as specified in the agreement.
b Why do economists say that a monopolistically competitive firm is producing too little output from an efficiency point of view? Briefly explain with a diagram.
Questions 1 and 2 do not need to be answered, they are just there for questions 3 and 4. Only bolded need answered.
1.Graph the following market demand function Q = 300-25P, plotting P (prices) on the vertical axis, and Q (quantity), on the horizontal axis. Next, show how much quantity demanded changes when the price of the good given by this demand function increases from $5 to $7?
2.Consider that the demand curve in part (a) above represents the market demand for a steak burger meal in a local area. This local area has three fast-food restaurants that exclusively produce these meals, and they are owned by Sam, Sony, and Sheila. Their supply curves for a steak burger meal are given as follows:
Sam's Eatery |
Sony's Hot Meals |
Sheila's "To Go" |
|||
Price ($) |
Quantity |
Price ($) |
Quantity |
Price ($) |
Quantity |
2.50 |
0 |
2.50 |
5 |
2.50 |
5 |
5.00 |
15 |
5.00 |
20 |
5 |
15 |
8.00 |
28 |
8.00 |
42 |
8.00 |
30 |
10.00 |
35 |
10.00 |
50 |
10.00 |
40 |
12.50 |
55 |
12.50 |
75 |
12.50 |
60 |
15.00 |
80 |
15.00 |
100 |
15.00 |
80 |
3.Consider the exercise in Question 2. The government now declares that steak burger meals in that locality should sell for $5.00. Given the correct answers in Question 1(b), would this represent a price ceiling or a price floor? Explain. Further, determine what would be the quantity of shortage or surplus that would exist in this market, and be explicit whether it is a surplus or a shortage and explain why.
4.Given the readings you looked at on price controls, what other problems typically arise, besides shortages or surpluses, when price controls are put in place within well-functioning markets?